Rackspace (RAX) Stock Up on Possible Takeover

Shares of Rackspace Hosting Inc. (RAX) were up +2.76 or +7.41 percent to $40.00 per share in Monday's premarket trading after news of a possible takeover of the company by telecommunications company CenturyLink (CTL). Rackspace Hosting stock closed at $37.24 per share, up +0.03 or +0.08 percent in Friday's regular trading session.

San Antonio, Texas based Rackspace Hosting Inc. is a global IT hosting company offering cloud services and providing hybrid cloud solutions to clients in the United States, Australia, Switzerland, The Netherlands, Hong Kong , Israel and the UK.

The company runs its app division from Blacksburg, VA with additional offices in Austin, TX and San Francisco, CA.

Monroe, Louisiana based CenturyLink Inc. is a communications company that provides data and communications services to businesses and residences, as well as to government and wholesale clients. The company founded in 1968 offers land line telephony, fiber optic broadband and fixed line internet and hosting services and digital television.

Rackspace first notified its shareholders that it was putting itself on the market in May and last month conducted an internal review of the company's strategic options. The deal which has not yet been confirmed will most likely be for CenturyLink stock in order to avoid a debt downgrade to CenturyLink which might be the case if the company finances a large deal.

CenturyLink has been active in expanding its Cloud presence and paid $2.3 billion in 2011 for Savvis in order to build up its hosting and data center businesses. Also in 2011, the company paid $22 billion for Denver based Qwest Communications International Inc.

More recently, the company has acquired other cloud infrastructure vendors such as Appfog and Tier3. The purchase of Rackspace will help CenturyLink compete with other major cloud vendors such as Amazon Web Services (AMZN), Microsoft (MSFT), Google (GOOG) and International Business Machines (IBM).

Cloud services have become increasingly popular as customers move computing and data storage to the cloud to lighten the load on their local servers. Rackspace employs software and servers for the storage of customer data, which saves their clientele from buying expensive equipment or having to operate their own data centers.

With a market capitalization in excess of $5 billion, Rackspace could be a good fit for CenturyLink, which is currently valued at more than $26 billion. Nevertheless, a deal has not been finalized, no purchase price has been announced and spokespeople for both companies have declined to comment on the issue.

Rackspace had its initial public offering in 2008 at $12.50 per share. The company's stock has traded as high as $79.24 in January of 2013; however the stock has since fallen to less than half of that price and traded below $30 per share as recently as mid August. Nevertheless the stock is trading at more than triple its IPO price.

The market is indicating a deal is definitely in the works. Both stocks are well worth watching this week as the possibility of a competing bid for Rackspace could surface from another company. It may be too early to tell whether a deal with CenturyLink will go through.

Jay Hawk enjoyed a 12-year professional financial markets career incorporating extensive first hand futures and options experience obtained by trading in the stock, commodity and forex markets on U.S. exchanges. Since retiring as a full-time financial market professional, he has been actively trading stock, commodities, forex and options for his own account and managing funds for others, as well as writing financial market commentary and educational articles.